MAKING CENTS: Sustainable spending key to retirement

By John Napolitano, CFP CPA

Tuesday

Jan 23, 2018 at 9:30 AM

When it comes to retirement, the big question is how much you’d like to spend and whether or not that is sustainable. There are crazy myths or rules of thumb touted to help determine your retirement needs, but don’t believe them. The only way to know what your retirement years will cost is to spend some time to dream and put pencil to paper -- or fingers to keyboard for the more technologically capable.

The dreaming part is most important. Developing a vision of how you’d like to spend your 168 hours per week when the boss isn’t asking for at least 40 of them may be the most significant. This isn’t as easy for some as it is for others. Try to do this without your own financial baggage interfering with your free thoughts, and focus on what you’d really like to be doing with your days. If you’re having some brain cramps, consider approaching this from the perspective of looking back on your life as if tomorrow was your last day. Think about your regrets and the things you wished you had been or done – and factor them into your plan.

When your vision is clear, you can begin to quantify the costs associated with that lifestyle. Don’t be thinking that I’m suggesting winters in Maui, even though this time of year that sounds good. I’m thinking of even simpler pleasures such as more time visiting your grandchildren or elderly parents.

Factor in these visionary types of expenses in addition to having a good command on your regular cost of living. To determine your regular cost of living, you can be as nerdy as your patience will allow. You can look back on your last year or two of expenses, and use that as your baseline for expenses or simply take your income, subtract taxes and savings and call the rest spending. The latter is a good place to start for forecasting purposes, but a more granular approach is recommended to get a better idea of what is feasible.

Most experts also advise factoring in medical costs greater than what you may be accustomed to paying. In addition to an increase of possible out of pocket costs and deductibles, also stress test your situation for a catastrophic long term care issue. This is probably the most significant wild card risk in the retirement plans of most Americans today.

There are only four main categories of possibilities. The first two are where you have no to little coverage for long term catastrophic health issues and you do or do not have a health issue. The other two are simply where you have adequate coverage and then either have or do not have a health issue. Two scenarios are likely to work where the other two may not – and could even cause irreparable damage to a surviving spouse.

The bottom line – toss out the rules of thumb and mind your own business when it comes to your own retirement plan.